ID Engineering Works Limited for Value for Money Construction Works

Dsicuss about the Rate Of Return To Convex Adjustment Costs.

Asset management and design is good for asset usability and depreciation in accounting matters. Our company is known as ID Engineering Works Limited, a public limited company that deals with civil engineering and civil works. The best way to give quality services in construction of buildings and roads is by ensuring there is reliability and maintainability of construction equipment like fork lifts, graders, construction trucks and rollers. As one of the biggest civil engineering companies, ID Engineering has strategically placed itself at the center of civil engineering works in the country and is among the most sort after. The organization aims at reducing the levels of wastages in the civil engineering industry therefore giving value for money for every client including the government and private sector (Asset management, 2008).

There are two main aims of stakeholders in a company. The first is shareholders and other stakeholder’s wealth maximization through ensuring that there is value for money in projects conducted and value for every equipment. The second is shareholders profit assets through dividend payout for the reason that they are own the company. In this case, there are different expectations of various stakeholders of the company. The first expectation is that the company will be a going-concern. This means that the company can leave to see the foreseeable future. It is important to note that stakeholders’ confidence grows when the company maintains a growth trajectory meaning that it cannot go under at any time (Cautionary tales for the modern investor, n.d.). The second expectation is that the company will remain profitable and therefore keep on giving back return on investments to stakeholders. Specific assets in maintenance include the truck lorries, construction folks and graders. It is their expectations that the company equipment will be used well, serviced regularly and maintained to avoid losses. Their need is there to be competed with against the needs of competitors.  The good reason is that the holders always yarn to maximize their profits (Mathew et al., 2006). 

Our Reliability, Availability and Maintainability (RAM) methodology provides an integrated analysis of the expected performance of the systems based on their design, operation and maintenance. RAM is essential in life cycle costs and asset management programs. The RAM models are used to evaluate the reliability and availability of a specific system and / or equipment, taking into account the specific data of the plant and / or a data source of reliability and maintainability specific to the sector, in case it is not have data of the plant (Mathew et al., 2006).

RAM Methodology for Expected Performance of Construction Equipment

The results of RAM include:

• Criticality of systems and / or equipment
• Reliability and inherent availability of the system
• Forecast of future operational availability

The Integral Maintenance Optimization (MIO) proposes a global approach to develop its functions within the framework of Operational Reliability. Some of the Reliability Engineering tools are also studied, such as the Criticality Analysis, the FMEA, the RCA and the RBI, necessary in the implementation of an “Integral System of Operational Reliability for the industrial services area of ??the IBD Engineering Limited, which is presented as a practical case.

The result and success of the system was quantified in terms of the reduction in the risks of the plant, reduction of the failure rates and the control of the mechanisms of deterioration, at the same time as the operating costs were stabilized and a considerable reduction was achieved. The total maintenance costs. The MIO includes the most advanced tools in these aspects, becoming a powerful lever for the transformation of modern asset management (Zuo et al., 2018).

In the last years, maintenance within modern industry has undergone a series of profound technological, economic, social, organizational transformations. These changes are a consequence of the current competitiveness of the businesses and the globalization of the markets. Given this scenario, the principles of Asset Management based on Operational Reliability Engineering represent the only effective way that allows companies to efficiently face the constant challenges to which today’s organizations are subject.

Operational Reliability is defined as a series of continuous improvement processes that systematically incorporate advanced diagnostic tools, analysis techniques and new technologies to optimize the management, planning, execution and control of industrial production. Operational Reliability implies the capacity of an installation (processes, technology, people) to fulfill its function or the purpose that is expected of it, within its design limits and under a specific operational context (Abel, 2001).

The maintenance in each one of the levels of its organizational structure must provide improvement strategies, from the diagnosis and analysis of the opportunities for the optimization of costs and the evaluation of the impact of the maintenance, in its four fundamental areas:

The Integral Management of Maintenance, includes a series of strategies aligned with the mission of the business, whose objective is to achieve Organizational Competitiveness. To achieve it, there are five key factors: safety, Productivity, respect for the environment and Reliability (Abel, 2001).

Reliability is what enables the four factors to be insured over time and therefore guarantees profitability. The Reliability of Assets is the key strategy to manage information and make the best decisions. The development of Assets, is therefore the indispensable element to increase the Reliability of the Assets. The Reliability of assets is defined as the probability of efficient and effective performance of people, in all processes, without committing errors or failures derived from knowledge and acting human, during their work competence, within a specific organizational environment (Guidelines for risk based process safety, 2007).

• What is time value of money? Explain how compounding and discounting are used in capital investment decisions.

The Theories of Cost of Capital in the Valuation of Assets

This time I will review some ideas related to the theory of the cost of capital and its use in the valuation of assets.

To value a company is to use techniques of financial analysis, and good judgment, to achieve an approximation to the intrinsic value of a company. There is a range of methods to find the theoretical value of an asset, however, in this blog we will review one in particular: the discount of cash flows.

[Discounted cash flow is a valuation method based on the theory of project evaluation, consisting of updating a stream of future cash flows.]

Precisely the element that brings future flows to the present is the discount rate. This is a percentage that serves to homogenize over time the different cash flows expected to be generated by the company in the future. It is also possible to conceive of this rate as the minimum annual return that will be required from the company to provide in the future.

To calculate this value we must know what is the discount rate to which we must update the various cash flows. This rate is indicative of the minimum return required for the investment in the corresponding financial asset and, therefore, is a function of the systemic risk of said asset.

[The risk of any asset can be subdivided into two parts. The specific risk and the systematic risk indicative of those variations of its performance that are not attributable to said asset. The specific risk can be completely eliminated through good diversification, which is not the case with systematic risk.]

The expected return of any asset is solely a function of its systematic risk as its specific risk is considered voided. If the investor does not cancel the specific risk of his investment through an adequate diversification, he will be running a risk for free, since the expected return of the project only pays the systematic risk (Results-based management and accountability framework (RMAF) and risk based audit framework (RBAF), 2007). The development of Assets, is therefore the indispensable element to increase the Reliability of the Assets

To calculate the discount rate it is essential to find out the risk of the target company, since the process of updating flows, provides us with a means to incorporate it through the discount rate. The more risky is the business of the company that you want to buy, the higher the discount rate appropriate for cash flows and the lower its current value, that is, its intrinsic value (Creelman and Smart, n.d.).

The cost of capital must be consistent with the valuation procedure of the company and with the definition of the cash flows that will be discounted, for this it must comply with the following:

Be a weighted average of the costs, of all sources of financing of the company, in the medium and long term.

 Gaps identified in current practice (appropriateness) when compared with good practices/ international standard 

Nominal annual yield rates will be used for nominal cash flows. If real rates are used, the flows must be updated according to the variation of a price level index or the variation of the expected annual inflation rate.

It must be adjusted to the systematic risk of each fund provider, since he expects a return appropriate to the risk incurred.

The weights should be calculated based on the market values ??of the different financial sources. In the absence of these values, the available accounting information should be used.

The discount rate is subject to changes through the forecast period of cash flows, due to alterations that may occur in inflation, systematic risk and capital structure.

The development of Assets, is therefore the indispensable element to increase the Reliability of the Assets. The Reliability of assets is defined as the probability of efficient and effective performance of people, in all processes, without committing errors or failures derived from knowledge and acting human, during their work competence, within a specific organizational environment (Millot, 2014).

 What sources of financing are relevant to the calculation of the discount rate

To determine the cost of capital, we are interested in the resources that finance the fixed assets of the company plus those needed to finance the increase in working capital. All these financial resources are medium-long term, which is why we will only use them to calculate the average capital cost.

Conclusion

The cost of asset management.

Preferred assets have priority in the collection of dividends and when liquidating the company over the rest of the assetsholders. Its cost will be determined by the relationship between the dividend to be paid to the preferred assets and the market price of said assets (Millot, 2014). The cost of issuance will have to be subtracted from the market price: kp The weighted average cost of capital (WACC).

	A	B	C	D	E
Initial investment:	100,000	200,000	150,000	100,000	150,000
Annual net receipts:	120000	240000	300000	140000	180,000
Salvage value:	20000	40000	150,000	40,000	30,000
Study period in years	5	3	4	3	4

	2002	2003E (1)	2004E (2)	2005E (3)	2006E (4)	2007 Steady State
Net sales	1 204,0	1 282,0	1 365,3	1 454,1	1 548,6	1 649,2
Operating Income	85,2	90,7	96,6	102,9	109,5	116,7
– 0,1	56,6	58,9	130,0	140,0	150,0	160,0
			90,0	96,0	102,0	108,5
-0,089	44,56	41,15			61,5	65,2
Terminal Value, TV					1051,61
Discounted Cash Flows, DCF					689,99
Enterprise Value, EV	775,61

	2002	2003E (1)	2004E (2)	2005E (3)	2006E (4)	2007 (5)	2008 Steady State
Net sales	1 204,0	1 306,3	1 417,4	1 537,9	1 668,6	1 810,4	1 946,2
99,09	90,37	896,34		105,8	113,8	122,3	131,5
Cost Savings				80,0	80,0	80,0
Capital Expenditures	23,8	175,0	130,0	140,0	150,0	160,0	170,0
Depreciation expense	21,0	84,2	90,0	96,0	102,0	108,5	115,4
Free Cash Flows, FCF		-64,2	-6,5	141,8	145,8	150,8	76,9
Terminal Value, TV						1478,83
Discounted Cash Flows, DCF		– 56,974	– 5,15
Enterprise Value, EV	1023,68

How maintainability is measured.

The Mct requirement for an equipment item is 70 min. and the established risk factor is 10%. A maintainability test is accomplished and produced results given in the table below for the 50 testing tasks.

References

Abel, A. (2001). On the invariance of the rate of return to convex adjustment costs. Cambridge, MA.: National Bureau of Economic Research.

Asset management. (2008). London: BSI.

Cautionary tales for the modern investor. (n.d.). .

Creelman, J. and Smart, A. (n.d.). Risk-based performance management.

Guidelines for risk based process safety. (2007). Hoboken, N.J.: Wiley-Interscience.

Mathew, J., Kennedy, J., Ma, L., Tan, A. and Anderson, D. (2006). Engineering Asset Management. London: Springer London.

Millot, P. (2014). Risk management in life critical systems. Hoboken: Wiley.

Results-based management and accountability framework (RMAF) and risk based audit framework (RBAF). (2007). Ottawa: Industry Canada, Industrial Technologies Office.

Zuo, M., Ma, L., Mathew, J. and Huang, H. (2018). Engineering asset management 2016. Cham: Springer.